MNI: PBOC Seen Gradually Weakening Yuan Fixing Amid Trade War

The People’s Bank of China is likely to gradually weaken the yuan’s central parity rate as depreciation pressure builds during the trade war, but will not permit any sharp fall against the dollar barring a complete breakdown in relations with the U.S., as this could encourage capital outflows and weaken China’s negotiating hand, policy advisors and traders told MNI. 

A sharp depreciation of the Chinese currency would currently be "more detrimental than beneficial,” because it would risk exacerbating capital outflows and spark significant volatility in Asian exchange rates, undermining regional cooperation, a policy advisor said.

A significantly weaker yuan would also help ease inflationary pressures in the U.S., detracting from China’s position in talks with the administration of President Donald Trump, he added. (See MNI: PBOC Persists With Yuan Support For Now-Advisors)

While a moderate depreciation could mitigate strength against non-U.S. currencies, easing the impact on exports, the PBOC will ensure that the yuan weakens only at a controlled pace, the advisor said, barring a complete breakdown of negotiations with the U.S. However, in an extreme scenario, if China completely decouples from its economic ties to the U.S., the yuan could fall towards 8 to the dollar, he added. 

CNY closed at 7.3368 at 4:30pm Beijing time on Tuesday, the second weakest since December 2007 after 7.3415 on Sept 8, 2023. The offshore USDCNH rate printed at 7.3631 at the same time. 

The CFETS Weekly RMB index, gauging the yuan against a basket composed of the currencies of 24 major trade partners, has decreased 2.66% this year to 98.77 on Monday, the lowest since September 2024.

KEY LEVEL

In the short term, 7.35 remains key for the onshore USDCNY rate after the central bank’s daily fixing breached 7.20 on Tuesday, the highest since September 2023, a trader in Shanghai told MNI. 

Trading is allowed within a 2% range of the fixing, which the PBOC had kept below 7.20 for over a year to cap USDCNY at 7.34, but, now that level has been breached, the Bank is likely to oversee an additional slow depreciation, he said. (See MNI: PBOC To Ensure Yuan Stability In Trump's Second Term)

The fixing was set 96 pips higher at 7.1889 last Thursday, the biggest jump so far this year, after the U.S. announced to impose an additional 34% tariff on Chinese goods, with traders detecting a change in the PBOC’s perceived forex bias. Market estimates had anticipated a fixing 54 pips lower that day, and the difference with the outcome indicated that the central bank had eased the application of its “counter-cyclical factor” calculations, traders said.

This allowed USDCNY to break 7.30 and  USDCNH to approach 7.35 last Thursday.

Offshore yuan liquidity showed clear signs of tightness on Thursday, as USDCNH headed towards 7.34, indicating continued support from the authorities for the currency, a Hong Kong trader said. 

Volatility is likely to increase in April as the trade war continues, he added, noting that while the yuan could potentially bounce back as expectations rise of a U.S. recession, any short-term recovery would be limited to 100 on the dollar index from 103 now.

The last trade war with the U.S. saw CNH weaken from 6.25 to around 7.10 to the greenback, a depreciation of about 14%, partially offsetting the effects of tariffs on Chinese exports from January 2018 to January 2020.